Australian Property News

Big banks ‘stifle housing development’

Posted on Tuesday, September 07 2010 at 2:07 PM

Restrictive lending practices by the big banks have led to property development being dominated by a few players, says property analyst Michael Matusik

He says the situation has only developed in recent years but no end is in sight.

“The only developers capable of getting a project under way at present are the large corporations, private high-net-worth individuals, cash-rich overseas companies or the micro-niched developer/builders, working the suburbs,” he says in the matusik snapshot.

“As a result, we now have a handful of dominant residential developers who largely control not only supply, but the marketplace in general.

“The new residential market used to be a very competitive one, with a diverse range of developers, who in turn helped keep end prices keen.

“One must question if this trend – and it seems to be accelerating – is really a good thing.”

Matusik quotes Cordell Weekly Construction Report figures showing new construction in general is falling across Australia.

“The number of new planned jobs is down 25 per cent; deferred or abandoned projects are up 73 per cent; and the actual number of new projects entering construction is down 30 per cent,” Matusik says.

“With regard to new attached product, and in particular apartments, it is hard to see much large-scale development getting started any time soon.”

He says local authorities, ironically, are approving big developments while “stifling” smaller development applications “which in most cases would get financial approval and improve housing affordability”.

He says one of the biggest challenges developers face in today’s market is coming up with sufficient equity or capital to allow a debt facility to be secured.

“The days of high loan-to-value ratio facilities being available to developers are all but gone, for the most part, unless they can contribute at least 30 per cent capital or equity towards the development. And even then, securing funding may be difficult.”

Matusik says the big four banks “don’t want to know” finance for property development although they publicly say they are “still in the business”.

“What they have done to reduce demand… is set the hurdles so high that very little stacks up and therefore doesn’t meet their current ‘credit criteria’,” he says.

“For most developers, the minimum requirement to even get an audience with a major bank requires a current development approval; a high level feasibility study; a valuation which is no more than 12 months old; a quantity surveyor’s report; a credible past track record and a total project cost, more often than not, under $20 million.

“This list is not that restrictive, until you overlay the banks’ high contingencies, high interest rates, short selling timeframes, high pre-sale prerequisites, inflated construction cost estimates and a profit margin over 20 per cent, which is nearly impossible to achieve at present.

“They are also scrutinising valuations much harder than in the recent past, causing many valuation firms to be ultra conservative in their ‘on completion’ assessments – further exacerbating the problem for developers.

“This is one of the reasons, in concert with planning delays, high and rising government taxes/charges and now falling demand, why new construction is falling across Australia.”